The Negative Gearing Parasites Are Back in Town

australian real-estate development

What about the Aussie market? Yesterday, stocks had a strong day. BHP [ASX:BHP] and Rio [ASX:RIO] accounted for most of the gains. They had massive bear market rallies, rising around 9% each.

This was clearly a short covering rally. Both share prices remain in the doldrums after suffering spectacular falls this year. Again, way too early to call a bottom.

On a positive note, iron ore prices are quietly heading higher. They’re approaching US$46 per tonne, up from a low of just below US$40. The stimulus measures put in place by China late last year are having a flow on effect.

But you’ve seen this play out before. The iron ore price falls along with China’s economic prospects, and then rises as short term stimulus measures kick in. Apart from this short term demand boost, the longer term fundamentals continue to look horrendous for iron ore.

The iron ore producers invested to meet rising Chinese steel production out to 2030. Instead, steel production looks to have peaked in 2015. Absent a bout of Japanese type monetary insanity, the fall in steel production is a structural change as China shifts away from fixed asset investment.

But who needs an iron ore industry when you have a booming property market, protected by the guardians of the rentiers, the Property Council of Australia.

Don’t you just love how democracy works in Australia? Get this, from the Financial Review:

The property lobby has warned marginal-seat MPs on both sides of politics they will be targeted at this year’s federal election if they don’t leave negative gearing alone.

With the Labor opposition having already flagged taking changes to the election, and the Coalition not ruling out change as part of its tax reform package, the Property Council of Australia compiled data listing the numbers of negatively geared voters in all marginal Coalition and Labor seats. It contrasts the number of those voters with the relatively small number of votes needed to change hands for the seat to fall.

That is as blatant a case of political ransoming as I’ve seen. What a bunch of parasites.

No doubt, negative gearing should be encouraged where it contributes to new housing stock. But where it is simply used as a tax minimisation scheme it should be abolished. That’s clearly for the good of the country. It’s effectively a tax subsidy for property investors.

But the Property lobby realises that the game has gone so far, with so many players involved, that even a grandfathering of the rules (assuming the rules change just to apply to new builds) would take the heat out of house prices.

Property Council chief executive officer Ken Morrison said that “to play with negative gearing is to play with the financial futures of 430,000 people who live in the most marginal seats”.

“My message to politicians is don’t think grandfathering any changes will not upset these investors. Grandfathering simply locks these people into holding the properties they currently have. It will stifle turnover and make these people angry,” he said.

“Beyond the politics, the policy implication of limiting interest deductibility is that it will make investments more expensive. In turn, this will exacerbate Australia’s undersupply of housing and infrastructure. This is the wrong approach for the challenges we have to face.”

What a load of absolute bollocks, Ken. Grandfathering the rules will allow these punters to keep claiming their tax deduction. What it won’t do is allow them to sell to another tax minimising investor, which would take some of the heat out of the market.

That’s a good thing, as families then have more of a chance to get into the market without having to take on such a huge debt burden.

And if you keep negative gearing for new builds, how exactly will that exacerbate Australia’s undersupply of housing? The argument is gibberish, because there is no argument.

The bottom line is that Australia has turned into a rentier economy, where the tax system encourages speculation and idleness, not innovation and resourcefulness.

The government needs to stand up to parasites like the Property Council, for the good of ALL Australians.

Greg Canavan,

For Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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